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Credit insurance warning for construction

The construction sector could be refused credit insurance, which covers bad debt following the insolvency of a customer.
Aon Trade Credit has warned that a very large spike of insolvencies predicted towards the end of 2008 could mean credit insurance costs could rise by at least 10% but, more worryingly, could lead to underwriters withdrawing cover during this crucial time.

The rise in insolvencies is attributed to:

• pressure on sub-contractors to accept discounted contract values and longer terms of payment
• cash flow continuing to be squeezed in all areas of sub-contracting, especially electrical, structural steel and specialist roofing;
• the increase in raw material costs, especially steel and aluminum, affecting margins;
• plummeting demand for residential house building and a substantial reduction in commercial building;
• lengthy applications of payment -
• Olympic construction has failed to boost the commercial sector, which remains heavily reliant on school refits with inherent delays of local government funding and on settlement of applications for payment.

'Insurers are doing their best not to flee from risk in the way that they have in previous recessions,' said David Thomas, director for Aon Trade Credit. 'However, with their loss ratios running in excess of 130% in recent years, we predict a severe increase in premium rates and an inability to negotiate long term trade credit insurance arrangements.

Aon recommends taking the following actions to help prevent slashed credit limits:

1) work closely with insurers to persuade customers to share confidential management figures with underwriters who are struggling to write cover on outdated accounts;

2) share your own balance sheet information with insurers to show your own creditworthiness and to reassure your supply chain;

3) identify the need for special contractor wordings in existing or prospective wordings;

4) manufacturers of bespoke products should seriously consider taking out insurance cover for work in progress if they have an extended manufacturing period and check current policy wordings for binding contracts cover;

5) take every opportunity to establish long term contracts with insurers to help control premiums which are likely to increase with high insolvency levels going forward;

6) reconsider insurers' debt recovery arrangements, if you have previously opted out;

7) if using discretionary powers within policies to set credit limits, review past trading history carefully and use systems like Aon's Trade Link facility to update credit reference reports.
19 August 2008

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